The Employer of Last

Resort:
the second reinterpretation of Keynes
Pavlina R. Tcherneva
Bard College
tchernev@bard.edu
Outline
• Unemployment: a monetary phenomenon
• Full employment definitions
• Automatic Stabilizers
• Keynes’s approach to fiscal policy: “on the spot” employment
• Minsky’s Employer of Last Resort (ELR)
• Problems with the aggregate demand model
• Modern formulation of the ELR: key characteristics
• An example: Plan Jefes in Argentina
• Reform of Jefes and consequences for its beneficiaries (esp. gender
effects)
Bank reserves

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Federal Reserve Assets

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Federal Reserve Assets

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Vickrey’s 15 Fatal Fallacies
• False analogy: private ≠ public debts (1)

• Debt will not swamp the fisc (8)

• A) currency issuer B) @ focus on full employment not the size of the debt

• Debts/deficits do not crowd out investment (3)

• Gov’t deficits create non gov’t surpluses

• Savings do not finance investment (2)

• No Ricardian Equivalence (9)

• No “bond vigilantes” for a nation with its own currency (12)

• Debt is not a burden on future generations. Opposite is true with full employment
and real resources creation (14)

• Currency value in terms of forex not a good measure of wealth (10)

• Eurozone will not be able to pursue full employment. Lack independent currency
Vickrey’s 15 Fatal Fallacies Cont
• Misplaced focus on inflation (4)

• Inflation is never a problem of too much demand. Measures to tackle it are =

“cruel vandalism”. (5)

• No NAIRU – cruel game of musical chairs (6)

• Unemployment is not due to kills mismatch. Job training just moves people
ahead in the unemployment line, without reducing the line (15)

• Capital gains tax cuts are of dubious social merit (11)

• “Deficit spending” ≠ “big government” (13)

• ‘Fixing’ the budget or interest rate fine-tuning are not sound policies. (7)
• Gov’t intervention is needed. Goal: chock-full employment
Unemployment: a monetary
phenomenon
• Unemployment is defined as idle labor offered for sale with no
buyers at that price.

• It occurs when the private sector, in aggregate, desires to work and

earn the monetary unit of account, but doesn’t desire to spend all it
would earn if fully employed.

• Involuntary unemployment is evidence that the desired H(nfa) of the

private sector exceeds the actual H(nfa) allowed by government
fiscal policy.

• Involuntary unemployment exists because the federal budget deficit

is ‘too small’.

• There may be several ‘deficit spending levels’ for a given

unemployment rate, so the direction of spending matters as well.
Tight Full Employment vs. NAIRU
• Vickrey: chock-full employment "last time we had acceptable level
of peace employment was 1926 when unemployment was 1.8%"
(1993: 86)

• Keynes: the task of policy is to "produce an unemployed level of less

than 1 per cent unemployed at the present time’’ (1980: 303)

• Beveridge “Slightly more vacancies than there are job seekers”

• Minsky 2% unemployment

VS

• 5.5 % NAIRU (90s episode); 6.7% today

• Spain NAIRU 20%+
Origins of the automatic stabilizer
concept
• Price mechanism
• classical, neoclassical

• Keynes
• Hansen (1941)
• Lerner’s Functional Finance (1943)
• Friedman (1948)
• Independent Treasury K. Poole (1951)
• deficits increase cash in the hands of the public
Different Types of Stabilizers
• Priming the pump
• “Shock”  “shot in the arm”

• Compensatory
• Offsetting device  I falls, G rises
• Discretionary
• Formula
• Counter-cyclical device that kicks in according to well specified signal (i.e.,
unemployment falls below X%, inflation rises above x%)

• Institutional
• FDIC
• Bank resolution
• Glass Steagall
Formula stabilizers
• Change in public works
• Change in taxes
• Unemployment insurance
• Farm subsidies
• Monetary and credit controls
Features of a good stabilizer
• Permanently installed
• Reliably linked to cyclically sensitive criteria
• Well defined in purpose and provisions
• Increases G spending in slumps and reduces it in expansion
• Expands the stock of cash in the hands of the public in slumps
and reduces it in recession
• Goes into action without awaiting fresh new policy decisions
• (Egle 1953, Hart 1948, 1953)
Employment Stabilizer
• Keynes’s ‘on the spot employment’

• Minsky’s Employer of Last Resort

The future of fiscal policy
• Hogwarts School of Policy
• Central Bank witchcraft and the confidence fairies
• Expectations

• Sound finance/ Austerity

• Near universal agreement that public debts & deficit are a problem
Obstacle to recovery, full employment, sustainable growth

• The mainstream’s ‘Bernanke paradox’

• “Dysfunctional finance” vs. Functional finance a la Keynes, Lerner

and Minsky 15
The second reinterpretation
• Keynes’s own approach mistaken for Aggregate Demand
management/boosting different components of GDP by various
means to close the output gap

• More appropriate to call it a “targeted demand” approach

(Tcherneva 2008)
• ELR proposal more closely resembles what Keynes himself had in mind
than what today passes for Keynesian policy

• Deficient demand for output vs. deficient demand for labor

• Orthodox or heterodox work that attempts to close output gap

inconsistent with Keynes on theoretical, methodological and policy
grounds
Keynes’s approach:
unemployment
• ‘‘an evil that is in the homes of the unemployed themselves . . . an
infection illness, [which] multiplies itself and spreads from house to
house unless something is done to check it’’ (Keynes, 1981a: 824)
• every person who is unemployed puts another one out of work, due
to losses in purchasing power.
• Other problems with the industrial system—two of the worst ones
are:
• casual labor of workers intermittently employed,
• And the ‘‘sweated home-work on the part of the women’’ (Keynes
1983: 174).
• The objective, is to create not only jobs, but stable and good jobs.

• A policy that ‘‘will bring back into employment not only the men
[sic] directly employed on its schemes, but as many men again
indirectly who will be drawn back by the purchasing power of the
men directly employed’’
Keynes’s approach: Theory
• Identifying the missing second ‘Keynes Plan’
• Rarely spoke of ‘fiscal policy’; public works instead
• Key theoretical reason: principle of effective demand
• Unemployment not a consequence of deficient aggregate demand but
deficient effective demand
• There is only one way to fix the point of effective demand at full
employment—direct job creation (policy cannot exogenously control
expectations)
• Direct job creation irrespective of the stage of the business cycle
• Boosting Aggregate Demand cannot do the job (more later)
Keynes’s approach: Method
OBJECTIVE: As close an approximation to full employment as is
practically possible

• What is full employment? Choice of units in the General Theory

• Demand gap analysis of a particular type: potential output
measured in terms of unemployed men and women
• Plugging the demand gap makes sense only if you are directly
increasing the demand for labor
• Output cannot be measured adequately in terms of current/real
prices, except for an instantaneous, brief period of time
• Potential output: impostor
• Okun’s law?
Keynes’s approach: Policy
• Fiscal policy effectiveness = f (employment-creation effects)

• Macro-stability cannot be divorced from the goal of full employment

(unemployment: a “special” problem)

• Public Works are essential for the short and long run: prevention, not just a
cure.

• We need to fluctuate public works with the needs of the business cycle
(somewhat clumsy); larger socialization of investment, experimentation when
needed.

• ‘Take the contract to the worker’ to special or distressed areas

• Do not discontinue public works at the peak of the cycle

• Rejection of income support/consumption stimuli; objections to cost/supply

price reducing policies
Keynes’s approach: Policy
• “man hours worked can be employed on the spot without a problem”

• To employ that 95 to 100 percent of national resources, including labor,

we would be “more in need … of a rightly distributed demand than of
greater aggregate demand” (Keynes 1982: 395)

• The job was to produce “a reduction of the unemployed to the sort of

level we are experiencing in wartime, that is to say, an unemployed level
of 120,000… or less than 1 per cent unemployed at the present time.”
(Keynes 1980: 303) Thus, policy makers had a responsibility to ensure that
“everything that could humanly be done has been done by the state”
(ibid.).

• Conviction, not cleverness are what’s required

Features of the Second Keynes Plan
• A permanent plan for direct job creation, that employs workers at the
margin
• Provides employment to all who want work
• Flexible policy to target special and distressed areas that cannot
generate enough employment even in expansions.
• Does not discontinue public works at or near full employment
• Does not sacrifice jobs in the name of preserving price stability.
• Has a permanent component that represents a considerable
socialization of investment for stability and a flexible component that
absorbs the unemployed from private enterprise in downturns for the
maintenance of full employment.

• Minsky’s reinterpretation of the missing Keynes Plan: The Employer of

Last Resort
Problems with Aggregate Demand:
Keynes
• [I]f the increase in demand is directed to products with a relatively low elasticity of
employment, a larger proportion of it will go to swell the incomes of entrepreneurs
and a smaller proportion to swell the incomes of wage earners and other price cost
factors. (Keynes 1964 [1936]: 287)

• In slumps: lavishness to put floor on demand, but not as a solution to Nf

• Aggregate demand does not solve structural unemployment

• Problem with boosting aggregate demand in expansions

• it causes prices to rise before it produces full employment.
• Near full employment it creates more unequal income distribution between
capital and labor, favoring the latter.

• The closer we are to full employment, the more troublesome it becomes to secure
a further given increase in employment via an increase in aggregate real income
(Keynes 1964 [1936]: 118).

• But we don’t abandon goal of full employment once we approach it

Full Employment Abandoned
• Rise of “free market” ideology

• Reagan: “Welfare Queens”; “Government is the problem”; “Trickle-

down”

• Clinton: “End welfare as we know it”, “Deserving Poor”

• Bush: “Ownership society”, “Compassionate conservatism”

• Democrats become “fiscally responsible”—Clinton/Rubin budget

surpluses  fiscal tightening

• Rise of “Predator State”, “Financialization”, “Neoconservatism” or

“Neoliberalism”, “Money Manager Capitalism”Bubbleonia, rising
debt, inequality, crises, disappearing middle class
Problems with Aggregate Demand:
Minsky
• Two reforms from the New Deal era:
• Finance downsized and constrained
• Direct job creation: 13 million jobs (WPA 8M, CCC 2.75M, NYA 2+M, etc)
• Unfortunately, the first was gradually eroded; the second abandoned in the Postwar
boom (belief: growth is enough)

• Minsky observed 2-3 decades of pro-growth, pro-investment fiscal policies and concluded:
• No financial crises
• Highest sustained growth and rise of the middle class
• But employment not as strong as during Wartime
• (recall Keynes’s full employment <1% unemployment)
• Gradual increase in income inequality
• Stability planting the seeds for destabilization
• US economy is incapable of producing tight full employment
• There is no tendency toward narrowing the income distribution

• Minsky: War on Poverty will fail

• Demoralizing: reform yourself first
• No significant jobs component; 1 minimum wage job per family would eliminate 2/3
of poverty
• Americans will not support generous welfare
Problems with Aggregate Demand:
Minsky
• Undirected Aggregate Demand is a problem

• Economic structure produces varied particular/regional demands for

factors of production

• Does not address unemployment from technological or institutional

change

• Demand is normally directed to high tech sectors that utilize high skilled
labor/a ‘Keynesian’ kind of trickle down

• Expectation is that demand trickles down to the unskilled

• Targeting high-skilled sectors is problematic
• Training, education, investment in human capital has long lead times
• Wages at the bottom must rise faster than those at the top

• Intrinsic heterogeneity of labor markets. How much demand is “adequate

demand”?
Minsky’s reinterpretation of Keynes’s
policy approach to full employment
• We need directed labor demand for all who want to work, not just
those who are considered ‘employable’ by the private sector

• ELR: Provides infinitely elastic demand for labor (Keynes’s fixing the
point of effective demand)

• ELR: permanent direct job creation in the short and long run

• Automatic stabilizer with the required features

• Inherently heterogeneous labor market (Keynes’s regional

approach)
ELR and poverty
• Tight full employment goes a long way to resolving the problem of poverty

• Keynes: “The real problems of the future are …the profound moral and
social problems of how to organize material abundance to yield up the
fruits of a good life.” (Keynes 1980: 261)

• Minsky: “capitalism necessarily generates ‘poverty in the midst of plenty’”

(1965, p. 175).

• Abandon the current method of dealing with poverty: welfare, income and
in-kind support, pro-growth aggregate demand management, supply side
policies, which try to “fix the poor not the economy” (Minsky)

• Minsky: take the workers as they are, fit the contract to the worker

• Most obvious effect of an ELR at a decent wage: it lifts the unemployed and
underemployed above poverty but also those who work full time at below
poverty wages
ELR: key features
• “Bubble up” policy, not “trickle down” economics
• hires off the bottom

• Operates with loose labor markets via a buffer-stock mechanism

• Has a permanent and flexible components that address cyclical, structural, seasonal,
unemployment, new entrants in labor market

• Creates an employable pool of labor

• maintains and enhances human capital

• Targets distressed areas; takes the contract to the worker; takes workers as they are

• Sets a floor to all wages via a public sector living wage level: effective minimum wage

• Employees perform valuable work

ELR: key features
• The fixed Job Guarantee wage provides an in-built inflation control
mechanism.
• It is a high quality anchor – maintains an effective labour supply at
minimum wage.
• It is not the panacea for all labour market problems.
• But it is better than the unemployment buffer stock option.
ELR: key features
• It is voluntary

• Spending is always at the ‘right’ level

• It has a transformative impact on:

• WORKERS: employment vs. unemployment
• FIRMS: Replaces the unemployed with an employable pool of labor, reduces training costs
• COMMUNITIES: urban renewal, fills social services gap
• THE ECONOMY: Sets a floor to wages and benefits, formalizes the gray economy, deals
with poverty

• It is permanent
◦ guarantees full employment: more demand or better distributed demand
Direct Job Creation in Practice:
Argentina’s Plan Jefes
• Voluntary
• 4 hrs of community work for unemployed heads of household at the
minimum hourly wage
• 2 million jobs in less than a year; 13% of the labor force showed
up for work
• Considerable impact on the poor, esp. women and minorities
• Countercyclical
• Stabilized output, prices, and currency
• ‘cost’ <1% of GDP, launched 8-12% GDP/yr growth
• government budget moved into surplus (note, sovereign finance,
no inherent financing constraints as during Currency Board)
• many program participants transitioned into private sector jobs
Full Employment and Growth
• Minsky: we have not had a meaningful debate on whether growth
by itself is an appropriate policy goal
• It does not create enough jobs
• It can promote rising inequality
• It can harm the environment

• Full Employment through ELR promotes:

• Shared prosperity
• Environmentally sustainable development path
• Growth with price stability
Wasting idle resources
• “The administration is trying to bring the Titanic into the harbor
with a canoe paddle, while Congress is arguing over whether to use
an oar or a paddle, and the Perots and budget balancers seem
eager to lash the helm hard-a-starboard toward the iceberg. Some
of the argument seems to be over which foot is the better one to
shoot ourselves in. We have the resources, in the terms of idle
manpower and idle plants, to do so much, while the preachers of
austerity…keep telling us to tighten our belts and refrain from using
the resources that lie idle around us.”

-Vickrey 1993 “We need a Bigger Deficit”